Bankruptcy: How To Start The Process [Is Debt Relief A Better Option?]

If you are going through financial turmoil, you might consider filing bankruptcy. Over the last 20 years, I’ve seen lots of people I know file for bankruptcy due to business failures or a bad economy.

In fact, during the recession of 2008 I also had a rough time with my computer consulting business and customers paying me what was owed. Many of them went out of business I could not collect on money owed to me for hundreds of billable hours.

Not being paid by my clients created a financial hardship for myself and forced me to start researching options. After speaking with a few financial experts, personal bankruptcy was my only choice for rebuilding a more prosperous financial future again. 

Below, I want to walk you through the process for starting a bankruptcy and how to know if it’s the right option for you.

What Is Bankruptcy and How Long Does It Affect My Credit Report?

Bankruptcy is a legal process that allows individuals who owe money to start fresh. If the process is approved, the person filing may be forgiven of all debts that can’t be paid off. Yet it still gives a chance for creditors to obtain some sort of reimbursement based on the individual’s assets available for liquidation. 

How Long Does a Bankruptcy Stay on your Credit?

A bankruptcy will stay on your credit for up to 10 years. However, depending on the state and the type of bankruptcy you file for, the time could be shorter than that. Before you file a bankruptcy, make sure you ask your attorney how long you can expect it to stay on your credit report.

Read on to find out more about filing bankruptcy and whether it’s a smart move for you to make.

What Different Types of Bankruptcies Can Be Filed?

There are a few different types of bankruptcies that can be filed. Here is a review of the types of bankruptcies that are filed most often. 

Chapter 7 Bankruptcy: This type of bankruptcy is for businesses and individuals with few or no assets. It allows debtors to get rid of their unsecured debts like credit cards and medical bills. If individuals have nonexempt assets such as family heirlooms, second homes, stocks or bonds, they must liquidate them to pay off their unsecured debts. If they do not have valuable assets to sell off, other than their car and basic household goods, they will be cleared without having to sell them.

Chapter 11 Bankruptcy: Chapter 11 bankruptcy is suited for businesses who need to get out from under their debts. The idea is that they will be able to re-organize and become profitable again. For instance, a business might consider raising its rates after filing bankruptcy to try to get back to a place where it is making money. 

Businesses that file a chapter 11 will still be able to operate as usual while working on a debt repayment plan under the court’s supervision. Preferred stockholders will still receive payments but common stockholders will not. 

Chapter 13 Bankruptcy:  Chapter 13 bankruptcy is known as a wage earner’s plan. It is recommended for businesses and individuals who earn too much money to qualify for chapter 7 or 11. Those who file for chapter 13 bankruptcy will be able to work out repayment plans for debts over a 3 to 5 year period. They will be able to hold on to all their property during this time. 

How to File For Bankruptcy; The Overall Process Explained

The bankruptcy filing process differs from state to state and it can also vary depending on the type of bankruptcy you’re filing. 

In general, the first step is to determine if you are eligible. If you are, you must file a petition. From there, a federal judge determines whether or not your debts will be dismissed. 

Administration of the case is usually handled by a trustee and there will be very little contact between the debtor and the judge. You will probably have to meet with the trustee at least once before any ruling can be passed.

You may need to take a credit counseling course and a debtor education course as well.

If all goes well, a discharge will be granted and you will be absolved of your debts.

However, there are certain debts that will not be forgiven with bankruptcy.

These include tax debts, child support, alimony, personal injury debts, debts to the government and more.

Also, some creditors can object to the ruling regarding the money you owe them. Secured debtors can also put a lien on your property for any amount owed.

Step 1: Always Seek Out A Bankruptcy Attorney

Sometimes people think the general rule of thumb is, if you are filing a chapter 7 bankruptcy that is pretty straightforward, i.e. you don’t own a lot of assets and you fall below the median income, you may not need to hire a lawyer to file.

I strongly recommend against not hiring a lawyer. Bankruptcy is a legal process and there’s too many technicalities that can go wrong unless you have a fundamental understanding of the laws.

The same is especially true for more complex Chapter 13 and 11 bankruptcy cases!

The best ways to find a bankruptcy attorney near you include getting personal referrals, or using lawyer referral panels. Group legal plan and online directories are also useful for finding the help you need.

Legal aid offices and legal clinics are great resources for finding legal aid for low income individuals.

Step 2: Knowing What A Bankruptcy Means Test Is

Before filing bankruptcy, it’s important to find out whether or not you will be eligible. The Bankruptcy Means Test will tell you if you’re eligible to file chapter 7 bankruptcy. It will take your income and family size into consideration to determine whether or not you have the means to repay your debt. You will need to provide documents to prove your financial circumstances.

If you pass the Bankruptcy Means Test you will be eligible to file chapter 7 bankruptcy. If you are not eligible, you may want to look into filing chapter 13 bankruptcy.

A bankruptcy attorney will walk you through this process, so don’t worry if it sounds confusing.

Step 3: Calculate The Costs For Filing Bankruptcy

The cost to file bankruptcy may vary from state to state. In general, the cost to file is just above $300. You also will have to pay for your credit counseling and financial management courses which can cost anywhere from $20 to $100. 

However, if you file with an attorney, it can cost thousands of dollars. A chapter 7 bankruptcy can cost anywhere from $1500 to $3000 with an attorney while a chapter 13 can cost anywhere from $3000-4000. 

Although filing on your own is way more affordable, there is a higher success rate if you have an attorney’s help.

Step 4: Carefully Consider The Pros and Cons Of Bankruptcy

Filing bankruptcy comes with its share of advantages and disadvantages. This section will summarize what you can expect.

Advantages of Filing Bankruptcy: The biggest advantage of filing bankruptcy is that you are forgiven of your debts. This gives you a chance to regroup and work on a plan for moving forward with your life. It’s also nice not to have to deal with creditors calling or sending letters to your home. 

Filing for bankruptcy also helps you maintain a baseline for your life that protects your home, family and car. This gives you the freedom to start fresh,

Downsides of Filing for Bankruptcy: Filing bankruptcy will have a significant negative effect on your credit making it difficult to get a credit card or get approved for any type of loan. It can affect your ability to find housing, buy a car and more. It may also affect your chances for employment in industries relating to financial services.

Step 5: Know How Bankruptcy Can Work on Different Types of Loans

When a person files bankruptcy, there are different types of loans they will want forgiven. Each one will have different requirements. Let’s take a look at a few.

Credit Card Debt: Credit card debt is one of the most common reasons people file bankruptcy and it is an effective way to eliminate this type of debt and the interest that comes with it. However, there are certain kinds of credit card debts you won’t be able to erase. For instance, credit cards used to pay for luxury goods are non-dischargeable.

You also will not be forgiven for credit card debts if you used those cards to pay for alimony, child support, back taxes or student loans. 

Bankruptcy with a Car Loan: You can file bankruptcy to get rid of the debt you owe on a car loan. However, the leasing company will take the car back after you stop making payments; but there are some exceptions. If the leaser files chapter 7 bankruptcy but is current on his payments and stays current on his payments, he may be able to keep the car. Alternately, if they file chapter 13 bankruptcy, they may be able to work out a payment plan to hold on to the car. 

Bankruptcy with a Home Loan: Bankruptcy with a home loan is similar to that of a car loan. If you file chapter 13 bankruptcy, you can work out a payment plan that allows you to hold on to your home. If you file chapter 7, it’s likely you will lose your home. However, there are laws in some states that make certain properties exempt. It’s advisable to look into your state’s exemption laws before giving up on your property.

Student Loans: Student loans most likely will not be eliminated by filing bankruptcy. Those who owe debt on student loans will need to prove that paying the loan will cause them undue hardship and they will have to provide evidence of this hardship in court. 99% of the time, student loan debt is not forgivable in a bankruptcy and it will follow you to the grave until it’s paid off in full.

After you’ve considered each step above, you’ll need to rely 100% on your financial advisor and bankruptcy attorney to give you a detailed step by step plan to complete a bankruptcy in legal federal court.

Bankruptcy Alternatives: Debt Consolidation and Relief

If you are feeling the effects of overwhelming financial strain, bankruptcy is not the only way to handle it. Here are some other solutions.

Bankruptcy vs. Debt Consolidation

Debt consolidation occurs when you take all your loans and consolidate them into one loan. For instance, say you are paying off a car loan, a student loan and several credit cards. You can take one credit card and pay off all your loans. Therefore, you will only be dealing with one payment and one interest rate. 

Debt consolidation won’t hurt your credit unless you continue to make charges on your card after you pay off your balances or if you are late on making payments on the card you are using to consolidate your debt. In this way, it is preferable to bankruptcy.

However, debt consolidation will only be beneficial if you are able to consolidate your debt onto a card with a lower interest rate than you are getting on your other loans. Also, you will be dealing with an interest rate which might not be an issue if you are paying off debts due to a bankruptcy.

In general, debt consolidation is best for those trying to get out of short term debts as opposed to those in deep financial trouble.

It is not recommended for those dealing with a loss of employment and substantial debt from which they do not have the means to recover!

Bankruptcy vs. Debt Relief

Debt relief or a debt settlement involves trying to negotiate with your creditors for a lower payment than the one you owe. Although this seems like an ideal solution, it does come with its share of downsides.

For one, in order to settle debts across the board, you will have to negotiate with each creditor. It is for this reason that many enlist the help of a debt settlement company, but even with the help of a professional, this is a timely process that could take 2-3 years. 

During this time, the company will tell you not to make payments on your debts which will add to your late fees. These fees will be an additional expense on top of what you will already owe the company for your service. 

Debt settlement will also have a negative impact on your credit but the damage won’t be as substantial as it would be if you’re filing for bankruptcy. Another thing to consider is that it won’t let you completely walk away from your debt as you will still need to make payments. However, many types of bankruptcies require you to make some type of payment as well.

In general, debt settlements are best for those who are falling behind on a few payments since they don’t have as many ramifications on credit.

Bankruptcy is a better option for those dealing with bigger financial problems such as unemployment and other forms of lost income!

Lastly, Be Aware Of What Bankruptcy Fraud Is

Even though filing for bankruptcy does not seem like the most appealing option for most people, some individuals will want to file for bankruptcy to have their debts forgiven, even if they have the means to pay them back. These people will engage in activity that is considered to be bankruptcy fraud. 

There are a couple of ways people commit bankruptcy fraud. The first is by hiding their assets. They may falsify or withhold documents to make it look as if they don’t have as much money or property as they do. This will make them seem as if they are eligible to file bankruptcy even when they are not. 

In other circumstances, people will buy products or services knowing they are about to file bankruptcy so they have no intention of paying them back. 

Bankruptcy fraud is punishable by fines of up to $250,000 and 20 years in prison. Creditors may also sue debtors who used fraudulent means to get out of debts with their company.

Final Thoughts: Is Bankruptcy Right For You?

Filing for bankruptcy can be one of the toughest financial decisions a person or business can make. It should always be a last resort and only considered after you’ve done everything in your power to find a financial solution for repaying your creditors. Ultimately, in the end, the only solution available for most is to restructure your debt payments or file bankruptcy. After you’ve explored all the possible options with a finance attorney, you’ll know 100% if its right for you or not.

I hope this article helped you out, be sure to check out my references below to get more information. Cheers! Scott

References:

Recent Content